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Should the Mayor of London Pay U.S. Taxes?

Recent discussion here has focused on the proper jurisdictional reach of income taxation -- namely the fact that the United States taxes individuals on the basis of citizenship. This cuts against the international norm. Almost all other nations (apart from the tiny African state of Eritrea) tax on the basis of residence or domicile. Even high-tax countries with costly social welfare regimes refrain from taxing on the basis of citizenship.

The U.S. approach can lead to some peculiar outcomes. Consider the strange case of London Mayor Boris Johnson, who was recently forced to settle a pending tax claimwith the IRS.

Johnson is a flamboyant character. Among other things, he is known for commuting to work on his bicycle and purposefully ruffling his hair before public appearances. He's especially popular with younger Brits, and his name is often floated as a possible Tory leader once Prime Minister David Cameron steps down.

He's also brash. In 2011, when President Obama was visiting the U.K., Johnson asked him to write British taxpayers a check for £5 million, representing unpaid charges the U.S. Embassy had incurred under London's traffic congestion charge. (The U.S. State Department argues that the congestion charge is a tax, not a fine, from which our diplomatic missions are immune.)

Although every aspect of his economic life is firmly rooted in Britain, Johnson holds dual citizenship. He was born in New York, but hasn’t lived in the United States since the age of 5. He keeps both a U.K. and U.S. passport. On numerous occasions he has considered relinquishing the latter, but declined to do so after learning the process was difficult, expensive, and time consuming.

By virtue of his continued citizenship, Johnson is a U.S. taxpayer. He learned that the hard way, when a correspondence from the IRS arrived in his mailbox seeking back taxes from a local real estate transaction. The following details soon emerged.

In 1999 Johnson and his wife purchased a home on Furlong Road in the Islington area of north London. The purchase price was £470,000. Because of a booming real estate market, the property's value more than doubled over the next 10 years. The couple sold the house in 2009 for £1.2 million, realizing a gain of £730,000. That's about $1.09 million.

We don't know the exact size of Johnson's U.S. tax bill. It's likely well into the six figures, assuming a 15 percent capital gains rate that was in effect in 2009. He's probably looking at interest and penalties as well. It matters not that the real estate is situated thousands of miles away from the nearest U.S. border, or that Johnson had not been a U.S. resident for 40 years at the time of sale. There is no claim of U.S. residence, and no claim of U.S. domicile. Nevertheless, the U.S. asserts a tax liability on the sale of a house in London. That leaves a lot of people scratching their heads.

Ironically, none of Johnson's gain was taxable in the United Kingdom. British law does not impose tax on the gain from the sale of an individual's first home. Thus, the bizarre outcome is that the mayor of London can sell a house in Britain and the resulting gain is exempt in the U.K. but fully taxable in the U.S.

And Johnson's U.S. tax concerns don't end with the Islington real estate transaction.

As a U.S. citizen, Johnson is also taxable on his foreign salary and wages. He reportedly earns £144,000 a year as mayor, and another £250,000 as a columnist for The Telegraph. Then there are book royalties from a recent biography he wrote about Winston Churchill. The foreign earned income exclusion (roughly £62,000) offsets a portion of those earnings, but the balance is subject to tax in the United States. Certainly the mayor of London maintains a British bank account, perhaps several, so let's not forget his filing obligations for the foreign bank account report. And, of course, there are now Foreign Account Tax Compliance Act considerations.

Johnson spoke defiantly about his tax conundrum last November during an NPR interview. He pulled no punches when asked whether he intended to pay the IRS. "No is the answer. I think it's absolutely outrageous. Why should I?" he said.

He was referring to the fact that, as a long-term U.K. resident and domiciliary, he doesn’t benefit from the public services the U.S. government provides. Our public schools, our roads and infrastructure, our police and military -- it's a stretch to argue that Johnson has benefited from them since leaving America as a preschooler in 1969.

As noted, he still owns a U.S. passport. That means he could, in theory, walk into a U.S. embassy anywhere in the world and receive assistance. Or he could move back to the U.S. for his retirement many years from now. Do these possibilities, however improbable, justify our citizenship-based tax policy? These questions are difficult to answer, and reasonable minds may differ as to the response. What we can safely conclude is that no other country, barring Eritrea, follows the U.S. stance.

True, there are tax treaty protections at play and foreign tax credits available. But the point of the story isn't double taxation; it's jurisdictional overreach. Many will argue that a citizenship-based tax regime is unfair and heavy-handed.

Read Comments (5)

Vivian DarkbloomJan 23, 2015

"The couple sold the house in 2009 for £1.2 million, realizing a gain of
£730,000. That's about $1.09 million.

We don't know the exact size of Johnson's U.S. tax bill. It's likely well into
the six figures, assuming a 15 percent capital gains rate that was in effect in
2009."

Not likely six figures (i.e., more than $100K before interest and penalties).
First, if the house is jointly owned or is community property (and his wife is
not a US citizen or resident), Johnson is only liable for tax on half the
gain. One would also hope that Johnson's advisors will give him a $250K
exclusion for his part. Alternatively, he could (if he still qualifies) elect
to file a joint return with his wife, in which case the exclusion is $500K on
the full gain.

And, I suspect Boris made substantial improvements increasing his basis. Six
figures is likely only if he and his advisors are incompetent.

As far as the foreign tax credit is concerned, it does not appear that Johnson
would have incurred any UK tax on that home sale if it was his primary
residence. For his sake, let's hope he's got some passive basket foreign tax
credit carryovers.

And, if the IRS wants to get really nasty, they could check to see if he had a
foreign currency gain on repayment of his mortgage. No kidding. Life as a US
citizen abroad can be insanely complicated.

Can we stop with the Eritrean tax system. The tax on nonresidents is tiny
(2%), not the full Eritrean income tax. And Western governments have
condemned Eritrea for using heavy handed methods of collection, such as, gasp,
telling its citizens that various consular services will not be provided unless
the tax is paid. Of course, Eritrea is run by a nasty, warlike, authoritarian
regime, so that's the real complaint.
No, the United States stands alone in imposing full worldwide taxation on its
nonresident citizens. Let's leave Eritrea, as unpleasant as it is, out of
this.

You can't assume he made substantial improvements. The London property market
has been such that, even without improvements, anyone who bought in 1999 and
sold recently would have easily seen the price of their property more than
double, without having made any improvements, in many areas of London.

Maybe what is putting him off is the tax on unrealised gains, or maybe it is
just the amount of time it would take, going back over his financial affairs
over his entire life, to work out if he has got unrealised gains that would be
taxed. He wouldn't want the risk of being accused of having made a false
declaration, if he declares that he has no such gains. So he has got to get
together all his financial records over his lifetime, if he has managed to keep
all of them, so that a tax adviser can look over them and advise him of the
position, and fill out the necessary tax returns for him. That could be very
time consuming, and rather expensive, and a hassle that a busy mayor can do
without.

I wonder how many times he has renewed that US passport. I don't agree with
the US' citizen-based taxation, but expatriates have the choice to retain or
renounce their citizenship, and choosing to renew that passport actively
continues using that citizenship.

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